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A Deep Dive Into Lowe’s Business

The company has stumbled recently, but it has generally been strong.

Lowe's (NYSE:LOW) has generally been resistant to suffering sales loss to digital companies. That does not mean that will always be true, and the company's latest moves show that it's planning for change.

On this episode of Industry Focus: Consumer Goods, host Vincent Shen is joined by Motley Fool contributor Daniel Kline to look at the company's operations. They talk about how the company targets homeowners versus contractors, and the chain's efforts to compete with chief rival Home Depot(NYSE:HD), as well as some new employee training efforts.

A full transcript follows the video.

This video was recorded on May 29, 2018.

Vincent Shen: Two days ago, Lowe's, the home improvement retailer, announced that they poached Marvin Ellison to become the president and CEO starting in June or July. Ellison is currently the CEO at J.C. Penney. But before then, he did spend 12 years working with the Home Depot as the head of their U.S. stores. And before then, he had a long tenure with Target. So this is definitely someone with a lot of retail chops, and not only that, he specifically has experience in the home improvement sector. Ellison's coming on as the current Lowe's CEO, Robert Niblock, plans to retire after a 25-year stint with the company.

With all that in mind, I thought this would be a good opportunity for us to talk about Lowe's, given how popular its rival, the Home Depot, is in the Motley Fool community and how well that stock has performed for investors -- up 135% in just the past five years, almost 700% going back a decade. But Lowe's stock has not been a slouch itself. For those same five- and 10-year periods, shares are up 125% and 350% respectively. It's only if you look at the more recent short-term time frame that performance for Lowe's has been lagging Home Depot and the broad market.

Given all the problems that we often talk about with brick-and-mortar retailers, what they're struggling with -- online players, weak foot traffic, price competition -- the home improvement sector has been very strong and resilient in the face of that.

Dan Kline: What jumped out to me in reading their recent earnings report is, only 5% of their business is digital. But the Ellison hiring suggests that they realize what some of the slow-to-digital players have realized, Costco would be a good example: that even the so-called internet-proof segments are becoming less internet-proof. Part of the reason you hire an Ellison is, he has experience taking J.C. Penney, an antiquated company, and building it to an omnichannel capacity, meaning that you can look at something at home, pick it up in the store, see it in the store, have it delivered to your home.

And with home improvement, while you're probably not going to order drywall on their website, the day where you order a light fixture or something that previously would have been a look-and-touch purchase, that's going to change. So this hiring really says, "Yes, we are immune to the internet for now, but we are going to have to make some slow changes." Again, nobody is going to buy paint based on viewing it on a website, unless they don't really care that much, but the day when they do is probably not that far off.

Shen: Alright, before we get into the nitty-gritty for this company, I want to provide some context and background for this business. It's a huge retail operation. They have about 2,150 locations spread across the United States, Canada, and Mexico. The U.S. is, not surprisingly, the most important. It makes up over 90% of the company's top line. The typical Lowe's is a pretty big store. They average about 150,000 square feet when you include both the indoor and outdoor departments and areas. The company employs over 300,000 people, so a big, big operation.

Listeners, I think, if you're looking at the home improvement sector within retail, you have to be aware of some of the backdrop for this industry. The home improvement retailers have been able to fight off e-commerce thanks to the highly specialized products, often bulky products, they carry. Even an Amazon is going to have a tough time fighting with Lowe's or Home Depot on things like lumber sales, or when you need that specific-sized piece of hardware, for example. People want to be in the store to be able to handle that, see how it fits with the other parts of their project. And that's allowed these brick-and-mortar retailers to remain pretty resilient.

Another important thing to know about this business is how the companies classify their customers, too. You have your everyday homeowners, who get divided up further among the do-it-yourself crowd and the do-it-for-me customers. They target them very differently. Then, you have the professionals, like contractors and repairmen, who also have their own set of needs, and they get targeted differently, as well, by management.

The last thing I'll mention in terms of backdrop, is when you have two major chains competing in North America and they both already have thousands of locations built out, and the market is largely saturated. Both Lowe's and Home Depot right now are focused at the moment on optimizing their current store base and the performance in their current store base rather than expanding their footprints very significantly.

Kline: Lowe's is only opening about 10 stores a year. That amount is really communities that are newly developed. It's not moving into existing areas. What their big focus on -- for anyone who's shopped in one of these, in a Lowe's, this is a big change -- is, in the last year, they've seen the amount of closes go down. Meaning, I walk into the store with an intent to buy something and I don't buy it. There's a massive training effort underway at Lowe's, where the goal is to have better customer service, to make sure that if me, someone who knows absolutely nothing about home improvement, walks in and says, "My sink is leaking," someone can actually help me get what I need, not have that sort of condescending, "We mostly serve do-it-yourselfers and experts" attitudes.

They're really rebuilding. They trained 17,000 back-line workers to be able to step in when times are busy. Meaning, a guy's job might be shelving or logistics, but when the line at the paint counter gets too long, he's now trained to mix paint or help a customer. They're really putting a focus on doing a better job, because I think they realize that Amazon can compete on some of this stuff if you don't deliver a good experience.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.